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Panel: Recession presents opportunity

Molly Madden | Wednesday, April 22, 2009

Professors Alexandra Guisinger, Nelson Mark and Mike Pries discussed the challenges and the opportunities that the economic crisis has placed before President Obama during “Facing the Obama Administration: Economic Policy,” the fourth installment in a lecture series sponsored by Pi Sigma Alpha, the political science honors society.

The talk centered on what aspects of the economic crisis the new administration have any control over changing, and the portions of the recovery process are out of the president’s hands.

“In dealing with the economy, the Obama administration has taken on the approach that this crisis is a challenge that they can turn into an opportunity,” Pries, a professor of economics, said. “In a time like this, the government can do things that they would not normally do if times were good.”?

Pries said, in the current recession, two tools the government uses are spending and lowering taxes because both actions should stimulate demand. Pries voiced his concerns over the recent stimulus package of $800 billion, half of which was tax cuts.

“I’m not too optimistic that this policy is going to turn out the way we want them to. Temporary tax cuts are not going to stimulate spending; the American people are going to take that extra money and save it,” Pries said.

Pries said he did not think the government expenditures were going to produce the results they are intended for.

“This big spending by government is really just a transfer to different organizations. It’s just like the taxes in the sense that the government is just giving people more money that they won’t end up spending in a way that will stimulate recovery,” Pries said.

Mark, a professor of economics, agreed with Pries that the stimulus package has many faults.

“A good portion of this stimulus package is not going to be spent until 2010. My personal feeling is that recovery is going to begin in the fourth quarter of this year so this spending will come at a time when we don’t even need it,” Mark said.

Mark said his main cause for concern was the precarious situation of the banking system.

“The banks that are in trouble now are the same banks that were in trouble six months ago under the Bush administration,” he said. “If we’re not careful, we can end up having no growth for a while if we do not clean up our banking systems.”?

The problem with the current Troubled Assets Relief Program (TARP) is the program is too small and Congress will not allocate enough money to adequately fix the problem, Mark said.?

“Because Congress has not been forthright in dealing with this problem, the Federal Reserve has been pushed into fiscal action,” he said.

Mark said the main issue with the banking situation is the problem of the insolvent banks. The banks owe more than what their assets are worth.

“What I feel we should be doing is closing the insolvent banks and selling their assets to the healthy banks. The taxpayers will have to pay for some of the action but the whole process is very fast and this is an action that can lead to robust recovery,” Mark said.

The problem with this solution is that many of these banks have reached sizes that make them virtually impossible to close, despite how much financial trouble they might be in, Mark said.

“In reality, a lot of these banks are too expensive and too entwined with the international community to close,” he said.

Guisinger discussed the international community and the implications of the crisis.

“Some of our recovery efforts are best done with other developed countries, such as the European countries. The problem in the long term is that the United States and Europe have different views of what [the] situation should be,” she said.

Guisinger said while the economic problems were mainly caused by the United States, other countries are feeling the ramifications much worse than Americans are.

“Americans are much more concerned right now with domestic measures but not with measures that would help the international community at large, such as strengthening the IMF,” she said.?

Guisinger said many of the problems and issues on the international level are ones that the Obama administration has no control over and in effect can do very little about them.

“The U.S. dollar is still in every bank in the world,” she said. “If countries decide to switch to a different reserve currency, Obama can’t do anything about it.”?

One thing that can be controlled is deciding what group is going to have to pay for the difference in the short term that could provide long-term effects and bring the economy back up.

“Somebody’s going to take a hit,” Pries said. “A whole bunch of money we thought we had is gone. How quickly we resolve this depends on how quickly we see who is going to end up paying. As soon as we do that, real recovery can begin.”